The Supreme Court of Canada shed a bit more light on the “bright line rule” for determining when a conflict exists when a law firm represents clients whose interests are adverse in the recent decision of Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39. The Court also provided further clarification regarding a law firm’s duty of loyalty to its clients and guidance for determining the appropriate remedy where this duty is breached.

In McKercher, Gordon Wallace hired McKercher LLP to act for him as the representative plaintiff in a proposed $1.75 billion class action against Canadian National Railway (CN) and others for allegedly overcharging western farmers to transport grain. At the time McKercher was retained by Mr. Wallace, the firm was acting for CN on several unrelated matters. McKercher did not tell CN in advance that it was entering into a retainer with Mr. Wallace, and after entering into this new retainer, the firm withdrew as counsel on some of CN’s matters. CN learned that McKercher was acting for Mr. Wallace in the proposed class action when it received a copy of the Statement of Claim, at which point CN terminated its relationship with McKercher and applied to disqualify the firm from representing Mr. Wallace. The Court of Queen’s Bench of Saskatchewan ruled in CN’s favour and disqualified McKercher from acting in the class action. However, the Court of Appeal overturned the disqualification and allowed McKercher to continue acting for Mr. Wallace, and CN appealed to the Supreme Court of Canada.

The Supreme Court allowed CN’s appeal, finding that McKercher breached its duty of loyalty owed to CN by breaching its duties (1) to avoid conflicts of interest, (2) of candour, and (3) of commitment to its client’s cause, which the Court described as the three salient aspects of the duty of loyalty.

In considering whether a conflict of interest existed, the Supreme Court applied the bright-line rule and found that McKercher clearly crossed the bright line by accepting the retainer with Mr. Wallace without CN’s consent. The Court upheld a strict interpretation of the rule, which stipulates that a law firm cannot concurrently represent clients whose interests are adverse without first obtaining their consent, even if the matters are unrelated.

Despite expressly rejecting arguments for a less strict interpretation of the rule, the Supreme Court pointed out that the scope of the rule is not unlimited. The Court clarified that the bright-line rule:

only applies where the clients’ immediate interests are directly adverse in the legal matters the firm is representing them on;

only applies to legal interests, not to commercial or strategic interests;

cannot be used tactically; and

does not apply where it would be unreasonable for a client to expect that the firm would not act against it in an unrelated matter (for example, with professional litigants, whose consent can be inferred when the conflicting matters are unrelated and there is no risk of improper use of confidential information).

When the bright-line rule does not apply, the Court endorsed a more contextual approach and stated that the test for determining whether a conflict of interest exists is whether there is a substantial risk that the lawyer’s representation of the client would be materially or adversely affected.

The Supreme Court observed that disqualification is normally the appropriate remedy for a breach of the bright-line rule in order to:

avoid misuse of confidential information;

avoid impaired representation; and

maintain confidence in the administration of justice.

However, the Supreme Court noted that disqualification may not always be warranted where there is no risk of misuse of confidential information or prejudice to the complaining party. In cases where disqualification is sought only to maintain confidence in the justice system, courts must consider factors that may weigh against disqualification, including:

conduct that could disentitle the complaining party from seeking disqualification (such as delay in applying for disqualification);

significant prejudice to the non-complaining client in retaining its choice of, or any, counsel;

a law firm’s having accepted the conflicting matter in good faith and with the belief that the concurrent representation would not breach the bright-line rule.

The Court found that McKercher did not have confidential information that could prejudice CN in the class action. Therefore, the only relevant ground for disqualification in this case is to maintain public confidence in the administration of justice, which requires consideration of the above factors. As a result, the McKercher case has been returned to the Court of Queen’s Bench to determine the appropriate remedy for CN in light of the Supreme Court’s reasons.

Dentons is the world's largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global Elite Brand Index, a BTI Client Service 30 Award winner and recognized by prominent business and legal publications for its innovations in client service, including founding Nextlaw Labs and the Nextlaw Global Referral Network. Dentons' polycentric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work. www.dentons.com.